Anti-poor and anti-rich: Product-downgrading and the distributional effects of UK inflation in the wake of the Brexit vote

In the second half of 2016, the United Kingdom experienced a strong increase of retail prices which was caused, among other factors, by a massive depreciation of the British pound in the wake of the Brexit vote. In this paper, we analyze the distributional effects of this inflationary episode, examining in particular the role that households’ decisions to adjust their consumption behavior at the extensive margin within narrowly defined products have played in this context. Using a very granular scanner data set on purchases of fast-moving consumer goods, we demonstrate that households at an intermediate income level engaged in product-downgrading, i.e. they switched from higher-priced varieties of a given product to lower-priced varieties, and thus limited the effect of the overall price increase. By contrast, poor households had no scope for product-downgrading since they already consumed the lowest-priced varieties. Rich households, finally, also did not change the mix of varieties they consumed and thus experienced relatively elevated inflation rates as well – probably because their higher income allowed them to tolerate the price increase.